Tax break for affordability

Green construction is a noble idea. But so is helping low-income people buy homes.

City Council has been debating the fate of Philadelphia’s 10-year property-tax abatement on new and rehabilitated residential construction. Supporters of the tax break argue that it was an important force in stimulating the city’s real-estate boom. Detractors say it’s an expensive giveaway that mainly benefits people buying luxury homes.

City Council is considering a bill that would restrict the tax abatement to buildings that have obtained the U.S. Green Building Council’s LEED (Leadership in Energy and Environmental Design) certification. While well-intentioned, this is the wrong approach.

The problem is that the tax abatement does not do enough to help low- and moderate-income Philadelphians. Requiring LEED Platinum certification, the highest level, to obtain the full abatement would only exacerbate this problem, as the significant added costs of green construction would be passed on to home buyers, ensuring that only the wealthy would benefit from the tax break.

The notion of attaching a public benefit to the abatement is a good one. However, instead of using the break to encourage green building, it should be an incentive for developers to invest in housing for low- and moderate-income residents. This would keep Philadelphia’s real-estate market competitive, while ensuring that more Philadelphians benefit from the abatement.

New York City took this approach in the mid-1980s, when its property-tax abatement came to be seen as too much of a giveaway. While Philadelphia and New York are very different places, our neighbor to the north has some valuable lessons for us on this subject.

In the early 1970s, New York was in a fiscal crisis, and the city introduced a property-tax abatement to stimulate the real-estate market. By the mid-’80s, however, the city’s real-estate market was booming, and a tax abatement with no strings attached no longer made as much sense. New York’s solution was to use the abatement to encourage the development of affordable housing.

The city created a Manhattan “Exclusion Zone” in which developers could receive a 20-year tax abatement by making 20 percent of their on-site units affordable. In the rest of the city (except for a portion of upper Manhattan where another structure was in place), developers could still receive a 15-year tax abatement with no strings attached, or they could obtain a 25-year abatement by making 20 percent of a development affordable.

In 2006, Mayor Michael Bloomberg expanded the Exclusion Zone into booming parts of Brooklyn. He also gave developers some abatement benefits for paying into a housing trust fund. The city has continued to tweak its approach over time to respond to changes in the market.

Philadelphia rode a similar wave of fiscal crisis followed by real-estate-market growth 20 years later. In the early 1990s, many thought Philadelphia was becoming the next Detroit. However, aided partly by the tax-abatement program, Philadelphia’s real-estate market is holding up better than those of most American cities. If the parallel with New York continues, Philadelphia should be up for its first tweak in the abatement program in the near future.

Philadelphia seems to have plenty of affordable homes citywide. However, many of them are substandard and located in poor, blighted communities. The point of programs like New York’s is to encourage new and well-maintained affordable housing in a variety of neighborhoods, not just the poorest.

Philadelphia cannot exactly imitate New York’s approach, because Pennsylvania’s state constitution requires uniform taxation within municipal boundaries. However, a citywide program that requires affordable-housing investment in exchange for the abatement could still be of great value, since most of the development that has benefited from the tax abatement so far is in Center City and other affluent areas with a shortage of affordable housing.

City Council should be praised for considering energy efficiency, but it should not pursue the bill that would require green certification to get the tax abatement. Instead, Council should focus on connecting the abatement to affordable housing — a public benefit more directly related to the problems created by a successful abatement program. After all, sustainable development is as much about affordability as it is about energy efficiency.